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June 7, 2005

Legal Online Music Stores Make Some Gains

by Sam Savage

LONDON -- Legal online music stores have gained a solid foothold against free file-sharing networks, according to new data released on Tuesday.

The beleaguered music industry has been pursuing a carrot and stick strategy of supporting legal alternatives such as Apple's iTunes, RealNetworks's Rhapsody and Napster, while filing a barrage of lawsuits against people and services that share music illicitly online.

According to data from market research firm NPD Group Inc, the efforts are bearing fruit: iTunes has surged to a tie for second place as the most popular online music source, with 1.7 million U.S. households downloading at least one song in March.

That put it neck and neck with the peer-to-peer service LimeWire and slightly behind another P2P service, WinMX, which has 2.1 million households.

Napster came in at No. 7 and the Real Player store -- now part of Real's Rhapsody service -- at No. 9 behind P2Ps including Kazaa and BearShare. Napster and Rhapsody's "all you can eat" subscription plans were not included in the rankings.

"One of the music industry's questions has been when will paid download stores compete head-to-head with free P2P download services," said Russ Crupnick, president of the NPD's Music and Movies division.

"That question has now been answered. iTunes is more popular than nearly any P2P service, and two other paid digital music offerings have also gained a level of critical mass."

While teens have flocked to free peer-to-peer services, the study found that older users have embraced legal online services due to the threat of lawsuits from the music industry. The average consumer buying music online was 33 years old.

"Legal services offer some obvious advantages: they're spyware free, and it's very quick and easy to get what you want," said NPD's Isaac Josephson. "The older, more affluent demographics are already a bit more inclined to go for convenience over free, and when you raise the legal issues that's an important tipping point."

About 4 percent of Internet-enabled U.S. households used a legal online music store in March, according to NPD. The study did not include the world outside the United States, where legal online music stores have been slower to launch.

Apple announced last month it would open iTunes stores in Denmark, Norway, Sweden and Switzerland, although it has yet to launch in Japan, the world's second-biggest music market.

NPD's study was based on observing the computer behavior of the panel participants rather than interviewing them.

"It's observational research, so we can actually see what's going on," said Josephson. "If you ask a 14-year-old kid, 'have you used a P2P service', he's not likely to be entirely truthful."